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Zuger Kantonalbank in Zug, Switzerland is now distributing brochures to the public listing the purchase and sale of precious metals as one of their services. However, the bank will no longer store metals that customers can withdraw later. Instead, the only option for a customer to sell any precious metals purchased through the bank is to sell it for cash.

A bank representative claimed that the bank would purchase the physical precious metals for the customer’s account, but would only store it in unallocated storage. Allocated or segregated storage was no longer an available option.

Unallocated storage offers little protection to customers should the bank suffer financial difficulties. In unallocated storage, the customer theoretically owns some portion of a large group of assets, but not any specific assets. By tracking ownership through paperwork rather than physical segregation of the metals, costs for such banks are lower. Therefore, fees for unallocated storage are lower than for allocated or segregated storage.

Here’s the bad news. Any precious metals or numismatic items placed in unallocated storage are considered to be assets of the storage institution and not of the customers who probably think they own physical precious metals. A bank customer is merely a creditor of the bank with a cash claim equal to the account’s value. The bank’s customers have no direct claim on the specific assets being stored for them by the bank. Further, the assets supposedly owned by the customer are available to settle claims by other creditors such as government agencies, unpaid loans, and for all goods and services provided to the storage facility by outside vendors.

Now that the Dutch bank ABN Amro and this Swiss bank have adopted explicit policies where customers who thought they owned physical precious metals stored with these banks cannot withdraw them, I anticipate that this practice will become widespread throughout the financial industry in the coming months. Although such policies do not yet reach to numismatic assets, I would not be surprised to see policies adopted that would apply to all assets stored at a bank or other financial institution.

In theory, the contents of safe deposit boxes are not tracked by the custodian banks. Therefore, an argument could be made that precious metals and numismatic items stored in safe deposit boxes rented in a customer’s name would not be affected by banks changing their policies about unallocated storage services. However, safe deposit boxes could be affected by changing government regulations, which put assets in such storage at risk.

Under escheats laws, assets in a safe deposit box storage that is considered “inactive” are at risk of being turned over to the government. Before such assets are turned over, the bank is supposed to make an effort to locate the owner of the safe deposit box, but that doesn’t always happen. Next, before the government can sell the assets, it is also supposed to make an effort to find the owners, but there are many documented instances where no such effort was ever made.

The governments of Australia and the State of California have enacted laws severely shortening the time frame for declaring safe deposit storage boxes as “inactive,” a trend that is being copied elsewhere. In one instance in California, a quantity of South Africa one-ounce gold Krugerrands in a safe deposit box were turned over to the state government with no efforts made by the bank or the state (which both had the accurate name and correct address of the owner) to locate the owner until after the California treasury had sold the coins.

This risk of not being able to withdraw your precious metals or numismatic items being stored at a financial institution reaches further than customer storage accounts and safe deposit boxes. It can also potentially reach precious metals exchange traded funds (ETFs) that use banks for storage services.

For example, the silver ETF traded under the symbol SLV supposedly holds physical silver for its assets. However, storage of these assets is the responsibility of the London branch of the bank JPMorgan Chase. As stated on Page 31 of the SLV prospectus, “The custodian may hold silver for the account of the trust on an unallocated basis. However, the custodian must take reasonable action to minimize the amount of bullion in the trust’s account that is on an unallocated basis, and the custodian must allocate silver bars to the account of the trust so that no more than 1,100 ounces of silver are held for the trust’s account on an unallocated basis at the end of each business day of the custodian.”

Should JPMorgan Chase adopt a policy that all physical silver held in its custody in the future will be treated as unallocated assets, this would change the safety of the silver being stored for SLV. This has not happened and hopefully will never happen. However, people who think they own physical silver because they may own some SLV shares should be aware that they could become exposed to this risk of loss of their assets.

In my judgment, the risk of a potential loss or a limitation on the ability to withdraw stored precious metals and numismatic items is increasing almost day by day. It is entirely possible that there are multiple claims of ownership against the same physical assets. People who have precious metals and numismatic items stored at a bank or who own shares of an EFT where the assets are stored at a bank should consider closing out such accounts by, if possible, withdrawing those assets.

Instead, seek storage facilities that are not at a bank or in a company owned by a bank. For example, the Delaware Depository Service Company (DDSC) in Wilmington, Del., and Diamond State Depository in New Castle, Del., provide custody services. Brinks may also be considered as no institutional shareholder owns more than 10 percent of the company and only a few banks own between 1 percent and 5 percent of the company stock.

When checking on these and other non-bank storage facilities, make sure to specifically ask for the availability and cost of allocated or segregated storage. DDSC, for instance, states near the bottom of the Overview page on its website (www.delawaredepository.com/overview.asp), “customer assets stored with DDSC are fully allocated and considered a bailment, not a deposit or consignment. Customer holdings are not an asset of DDSC and, accordingly, cannot be subject to the claims of any creditor of DDSC.”

There will be costs to transferring assets from one storage facility to another, but hopefully the peace of mind will be well worth it.

Patrick A. Heller is the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at www.libertycoinservice.com. Other commentaries are available at Coin Week (www.coinweek.com and www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly.” His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing.